Automatic Execution

Posted in Finance, Accounting and Economics Terms, Total Reads: 321

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Definition: Automatic Execution

Automatic Execution refers to the execution of a particular task, mostly trading, automatically not manually. Investors use this type of trading by developing algorithms which keeps on looking for predefined opportunities and executes them as soon as the arrive. There is no mediator in this as the program is doing all the work as per the predefined instructions.

Being in market for some time, an investor tends to develop their own responses to some indications as what should be done, buy sell or short, when a particular thing, say a news, happens and what to be done when other thing happens. Most of these things are repetitive in nature and very hard to track, a very good example is arbitrage. So by the time it comes to the knowledge of investor the opportunity is already gone. So, in order to track and take advantage of such opportunities investors started using algorithms, which are basically some set of instructions given to a computer. What an algorithm will do is it will keep on looking for such indications and as soon as it finds any opportunity it will execute the instruction which it has been programed to do. This way the probability of missing any opportunity reduces and the trade happens in no time, as there is no mediator the algorithm executes the trade in no time.

Example:

Let’s say in some country (country A) the sell price (ask price) of a particular currency is lower than that of the buy price (bid price) of the same currency in some other country (country B). In such conditions what you will do is you will buy the currency from A and sell it in B, hence earning profit without risk. Now track such opportunities is very difficult as they are very rare and exists for very small period of time. This is where you can use automated trading.